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tv   Key Capitol Hill Hearings  CSPAN  July 1, 2014 10:00am-12:00pm EDT

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again, i'm not a budget guy so not going to be a clever respondent to this notion of shifting the dollars from one place to the other, but what matters is to find a path forward that has this kind of predictable stability. and again we've lost ground. we need to sort of catch up, but then to have a sense that we will not be on a roller coaster ride, feast or femur. the most destructive thing you can do for the research enterprise. ..
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>> or working with darpa as we are doing and with fda on this toxicity chip. working on the brain initiative, a new effort which isúgoing to be focused between nih and nsf and darpa and a number of private industries and philanthropies trying to make sure these kind of interdisciplinary efforts that jim was talking about are tapped into in every way. we are always looking at that. we are even looking at our peer review system to ask whether while we claim it's the best in the world, are we sure about that? and are we sure our peer review system is reflecting the scientific opportunities of 2014 and not some earlier stage, and do we these to rethink about the way in which those peer review panels are established as far as what disciplines they represent. and we have the tools now with various kinds of text mining to really look and see what is going on in science that we might want to make adjustments for. so we're pretty bullish about
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that. another thing we are doing, again, this reflects something that joe gray said, to try to see if there are opportunities to put some of our grant funding, more than we currently do, into programs where you give stable support to investigator over a period of perhaps five years with the expectation that once you have one of those awards, you're going to actually get that down to science and not spend all of your time writing and rewriting and getting discouraged with rejections. this is a program at nih called pioneer awards that started this. it's been very successful. we're now proposing to expand that beyond the common fund into other parts of nih and to some pilot experiments. i think that will be a possible way to deal with some of this terrible waste of people's time where they're spending so much of their time in unproductive grant writing and just getting frustrated. but none of that will really sufficient tice. there's no magic that -- suffice. there's no magic that you can say now it's fine when you've lost 25% of your purchasing power and people see the current
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circumstance. you're not going to be able to fix that without getting back on that available trajectory. whatever we can do, that's got to be job one. >> i think one of the most important points of this effort is the fact that you've committed to a long-term look at the problem. and i think there are some significant issues that need to be addressed beyond just a stable mechanism of funding. for example, are there new resources that can be tapped that would support the kind of investment that we need? for example, done and way that were direct -- done in a way directly related to funding what created those opportunities and dollars for the industry in the first place. the other thing that's quite difficult issue to take on but i think would be an important consideration in how we're spending the dollars is to really look at indirect costs and the issue of funding infrastructure versus funding
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ideas. because one needs to, actually, roll up our sleeves and begin to take a deep look at the problem if we're going to create an entirely new way of sustaining it for the future. it's not just a matter of a mechanism for more money, it's a mechanism also of where are we getting the money and how we spend the money. >> thank you. thank you, mr. chairman. and for this new initiative. is it on? >> there it is. >> okay. and this is just the first of a three-year process, and the first step is discovery. so you're the first briefing. we will have other briefings and hearings as the health subcommittee. and we will translate the information you've given us today to other members who are not here so that all of our members can participate in this.
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and if i were doing another d, i would add diagnostic, diagnosis. early medical diagnosis of a disease. because the faster you can get the cure to the disease, the better and the least costly. i have a couple of questions. dr. woodcock, you mentioned something called clinical trial network. would you identify any barrier that is you see? do you need legislation to set this up? or what are the barriers now that prevent us from having clinical trial networks? and how can we use our technology platforms to accelerate the cures to bring researchers ask patients and innovators together? a couple of questions. >> well, these are all -- they're all related. and -- [inaudible] however, i think a lot of the barriers have been cultural in the way we've done things in the past, and this is how we've
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always done them, so this is how we will do them. but the availability of electronic health record, the availability to reach out to clinicians all around the country, to join them together and then to do trials utilizing that infrastructure and training could provide all sorts of linked networks. it could very rapidly answer questions which is really what device development is about. we ask questions; does this work, is it safe? you can rapidly answer those questions. you get products in to patients, test them and get the answers out. so a network is simply a group of trained people who are eager and ready and have the protocols in place to evaluate something, maybe many things. and registries are where you identify patients and then you follow them, and you can do trials this that registry, you can randomize people in that registry to one treatment or
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another and then follow them. these things are all linked together. this type of infrastructure that we don't really have too much in the united states, except we're driven really by patient groups who have gotten this set up to advance their disease. so i think it's a tremendous opportunity, and what ellen is talking about really was driven by patient group's lung cancer trial, and there are a couple of others going on. that trial right now is going to start out with probably five different investigational agents that can be evaluated so that every single person with that type of lung cancer, if they're screened, that trial, they will turn no one away. >> would clinical trial networks work with medical devices? dr. shuren? >> it would. actually, we back in 2011 had talked about how you might better identify centers of excellence, clinical trial sites that can do a better job and kind of put out should there be a voluntary certification. not something government runs, but market could really drive that. and then that's open to
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innovators to say, well, we know these centers are very good in areas. and it wouldn't be a one size fits all. some institutions may be very good at heart surgery, bowel surge, but that can help. and i think not only on the data collection prior to marketing, but think about it. those networks in place, you might be able to rely more on data collection after it goes to market because those networks are there. they'll be using those technologies, they're already geared to gather that information. i mean, we'd love to see something like that here in the u.s. >> i just want to respond to the the clinical trial that janet woodcock just referenced, the lung map that will start this, the end of the month. first of all, fda's at the table not only drugs, but cdrh. we're using next-gen sequencing on that -- >> right. >> so we're using a very new and interesting platform. nih is at the table. it's going to be done at every cancer center, every community in the united states, maybe even
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canada. and it's public/private. so we will learn very quickly. first of all, no patient will be refused access to a drug. so everyone will be screened. 100% of everybody on the trial will be screened with next-gen sequencing. if we don't have a specific biomarker for that particular patient, they'll go into a nonmatched arm, get immunotherapy. so we'll learn a lot. it's efficient, it's much cheaper than doing a normal clinical trial, and companies have been very eager to join it. and it is truly public/private. it is the way of the future. but i did want to say that this will, we do have cdrh drugs and nih at the table at this. >> uh-huh. >> thank you, mr. chairman. and this is among those interesting discussions in which i've ever been involved in this room, and i want to thank both of you for it. [laughter] there will be a test. that's why i've chosen to stay,
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diana. [laughter] i favor stable funding, dr. collins, and you and i have discussed this. and i think that the roller coaster has been unfortunate. and the roller coaster should be confined to disney world or coney island. however, from my perspective i'd be perfectly willing to discuss in a cordial fashion how we move forward on budgets long term, and perhaps we couldn't be as generous as would be optimal. but, of course, we need attarrer in in the senate -- a partner in the senate that passes a budget, and i hope that we have a partner moving forward, and we can have an honest discussion as to how best to fund nih appropriately in the national interest, and perhaps one of the ideas that has come out of this discussion this afternoon, and dr. burgess raised it, is somehow reauthorizing the nih.
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and i think that that is a very interesting idea. and i'm all for naming a building for dr. burgess. [laughter] now, we have a discussion about china. and i think it's informative, but i don't think it's dispositive. and to the panel in general, as i understand the system in china, it's quite different from the system here. here we rely on governmental funding. we rely on the nonprofit sector so ably represented by a great university and great charitable trust. and we rely on the for-profit sector, including the drug companies. many of which are headquartered in the district i serve. and we rely on venture capitalists. and so i would ask mr.leff and that three-legged stool on the for-profit sector, what should we be doing, recognizing we have a greater responsibility with
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more stable funding for the nih, recognizing regarding various universities we need to make the system better so that only the, the fact that only one in six grants is awarded should change. we ought to make that system better. regarding the for-profit sector -- which, to me, is an indispensable part of a larger whole -- what should we be doing? repatriating profits from abroad, perhaps? but what else should we be doing to encourage the for-profit sector in what is, after all, a system quite different from china's. >> it's a great question, and thank you for that question. you know, we've talked a lot about the investment in nih and this country just to put some numbers on it spends about, or invests about $30 billion a year in nih funding and for medical research. but private enterprise, private companies and investors put
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about $80 billion a year into r&d. >> yes, precisely. >> and so i think, hopefully, it's obvious to everyone here that this 30 be billion and the 80 billion are deeply intertwined, and in order for the private sector to make those investments, there has to be raw material coming out of the basic research. and we've talked a lot about that. in order for that investment this basic research to create new cures, there has to be that investment in private sector r&d to develop those scientific discoveries into cures for patients. so in talking about that 80 billion, it is important, and it's also got the benefit of not being quite the zero sum game that we have to come up with government funding in order to solve the problem. in order to enhance that investment, that 80 billion which i think, hopefully, it's obvious that if that goes goes up, all other things being equal, we'll get more cures and more treatments coming out the
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other end. >> we'll be saving more lives. >> saving more lives -- >> not only here, but across the globe and in china. >> absolutely. and creating more jobs in this country as well as saving more lives. if that goes down, then, of course, the opposite would be true. i would encourage this committee as it thinks about that issue to treat an economic problem with economic solutions, and that is to say to look at the decision that investors make and companies make about whether to fund biomedical r&d and which projects to fund and how much money to put into it is fundamentally economic. we all want to do it to save lives, but ultimately, investors will put their capital where the returns are. and if the returns to investment in private biomedical r&d is less attractive than investing in social networks or new electronic devices or natural resources, whatever it may be, then capital will go elsewhere. so it's an economic equation.
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and i think when you look at the recent history of policies coming out of congress and in this committee and elsewhere, you can see that impact. you can see the kinds of things that have been done from a public policy point of view that have enhanced investment in biomedical r&d. i would point to the orphan drug act a as a great example where it was recognized that r&d credits for investing in orphan drugs as well as exclusivity for developing orphan d that there is a better economic equation for making those investments, and we have seen dramatic increases in huge productivity of investment of orphan drugs. it's a great example. i think we've seen already some of the fruits of the gain act which was part of the fda safety and innovation act in 2012 where exclusivity was provided for antibiotics that address
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resistant infections. we've seen aely important area. so those are just a couple of examples. you know, what are some specific examples of what we can do going forward? well, one is to continue to enhance this dialogue about empowering the regulators with the tools to help speed development of the most important new therapies, and, you know, it really was fda who came forward and said we need breakthrough designation as a tool to do what we all want to do here, and that's worked out extraordinarily well in lowering the time and cost of developing certain therapies and attracting investment. well, now more recently fda has come forward and said we could really use a new tool which is sometimes called the special medical use pathway, also, you know, sometimes called the lpad, the limited population
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antidevelopment product. and there's been an act introduced in the house to implement that. now, that's a great step forward in that it's providing the consensus and the will of congress, the will of this country to give fda the tools it needs to apply the appropriate degree of flexibility to accelerate development of certain kinds of drugs. i believe and many believe that we ought to try even harder to give fda what it's asked for there, which is that this tool should be applied not just to new antibiotics, but to new therapies in many different categories where it could help accelerate important cures to patients. so that's, you know, one example. certainly, when we talk about tax reform and when we talk about economic incentives, these things matter, and they matter to the biomedical industry, and they matter to investment. one other dimension to mention here is how we pay for these new and innovative therapies when they come to market.
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and this is a really difficult issue, because we all know that expensive theraps cost money -- therapies cost hundred, they cost the budget money, and they are challenges to those who need the drugs. at the same time, if we're not the society to provide the real value, real cures to patients, then investors won't make those investments. so providing, i think, a dialogue which recognizes the value of innovation and recognizes that it's appropriate for new therapies to have a period of exclusivity this which they could recoup their investment and for the ones that provide real value to patients and really save lives, we ought to do everything we possibly can to figure out how to accelerate them to market and then have a consensus about the way in which we pay for them in a manner that creates the cycle of further private investment. >> thank you. let me say that this is an issue
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that deeply interests me. my bill modern cures is involved as are other bills, and i hope that we can work collaboratively in a bipartisan capacity on what is a three-legged stool in this country, and, mr. chairman and to the others who are leaders in this, i think we will have to as well work with the ways and means committee, was i there thk there is fundamental tax policy involved as well as the wonderful work we do on this committee. thank you, mr. chairman. >> well, thank you. let me -- i know myra's got a quick thing and jim a quick thing. i just want to say, too, it's my understanding that dave camp was able to usher through r&d permanent tax credit through the committee last week, and i expect that on the floor very soon. i'm going to let jim and then i'm going to let my colleague in crime here say a few things, and then i'll close things out, so we shouldn't be too much longer. >> two quick things on the economic. so on the front end of the, you know, sort of funding conundrum,
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the work of dr. andrew lowe has really achieved sort of star status in terms of the creation of a cancer megabond, and you could insert any disease state or pathway. you know, the idea is, basically, how do we aggregate risks in terms of funding that can go to companies that are doing development of products. i think that that is, certainly, one that the group should be looking at just in terms of the themes that he's articulated. and then on the other side that was just raised by jonathan, this issue of how are we going to pay. so the milliken institute just convened a panel discussion on this that was extremely insightful. if you build it, will they pay? because now we have to worry about what do we do with this innovation? can we afford it in the larger health care system? so i think there's an exciting opportunity here to close the is circle a bit -- the circle a bit. if we can prevent disease, then, please, let's prevent it. and, boy, do we have a lot of prevention work that needs to happen. if we need cures, let's figure
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out that part of the system and get the funding so that we can do it. but, boy, do we have to pay attention to that other end too which is how are we valuing this innovation, and how are we as a society going to sort of be able to take in what's coming through? i will say that in years past, you know, jonathan and his work and, you know, much of the work that's being presented here, when we were all at meetings on innovation, the big bugaboo that you always heard, the bogeyman, the fda. oh, fda's responsible for all the problems. not true, obviously, and not what you hear now. i e-mailed some colleagues at the fda recently, i was at mass bio, and i said, interesting, fda's not coming up at all. what's coming up is the specter of not being able to have products be reimbursed. so i think that's one that everybody can really sort of lean in collectively and start talking about this value equation. >> so to further comment on the economic realities, one of my
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responsibilities is to balance the budget for the medical school. while we get in 460 million in external funding last year, for each dollar that comes in we spent about 25 cents and were very efficient in extra dollars that had to support the research enterprise. and that's to mr. barton's point and the important of cms. because where those dollars come from for most academic medical centers where there's a mission, not an option to invest other places, but it's the mission to do research and education, those dollars primarily come from clinical revenues. a little bit from philanthropy, but you do the hath, and it's huge endowments -- math, and it's huge endowments that would be required to make up that gap. and that's why the decisions on funding that are made from cms
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which drive the privates are so critical to this research enterprise. was it's not just n -- because it's not just nih, but it's that supplement that every academic medical center puts into the research enterprise where it's the mission to look for the cures. it's not an option. >> well, i just want to say this met my expectations, and i want to thank everybody for coming today, and i really want to thank -- most of the members have left, but i can't really remember a more robust discussion among members of congress that we've had either about looking in a visionary way to the future, so thank you all for participating in our introticketly effort. fred -- introductory effort. fred, i'm excited to hear what your plans are next. [laughter] but i just have a couple of
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comments. the first one is, you know, joe, when you asked the question about funding, it wasn't just dr. collins who has a personal interest in increased funding for the nih, it was every single one of our guests today across all political backgrounds, all fields, all agencies and everything. but it's really not just a matter of let's just increase the budget of the nih and/or the fda, because it's not linear, you know? you don't -- it's not like purchasing things. it's not like purchasing something where you spend x amount of money and you get y amount of cures. that's why these discussions are difficult. so it seems to me it is, number one, the amount of funding, it really is. we still have -- we still are, we have the biggest commitment of any country in the world to this kind of funding, and some of the legislation i've worked
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on over the years when i did my stem cell legs and i traveled to other -- legislation and i traveled to other countries and met with legislators, they were saying to me we need to have stable research in the united states because we're hooking on, you know? the israeli researchers were the people in singapore or london or wherever, they're hooking on to our basic research. so it's not just -- when we cut research here, it doesn't only affect our junior researchers, it affects these other researchers around the world. and no amount of increased investment by these countries can make up for that knowledge that we have. but that's also why we really have to make sure that we do keep the funding steady and robust, because otherwise we won't have those researchers here who are doing that research that everybody else is hooking onto. so that's the first thing is, is we really do have to have a sufficient and robust research budget. there are and it has to be
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steady -- and it has to be steady over the long period. i think there have been a lot of good suggestions today. the second thing is that we have to be able to maximize the results. and this is something nobody really asked this question, although dr. burgess did bring it up a little bit, is in 2007 when we reauthorized the nih, we did some pretty good restructuring as you height remember, mr. barton. and we did that because when the nih was set up, it was set up with all of these different agencies which was wonderful, but the nature of research has really changed. and so you had to be able to do all kinds of interdisciplinary research. and that's why we did the structure of the nih at that time. we've made a lot of innovations over the years working in conjunction with the fda, and i'm very pleased to hear from the witnesses that a lot of that seems to be working. so here's -- this is all a very
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long way of leading up to my question which is, and you may not even be able to answer it today. one thing that tred and i are really thinking about -- fred and i are really thinking about as we look at this big picture view is are there ways going forward that we can restructure or tweak the structures of some of our key research agencies? not just the ones represented here today, but cdc, the labs, other agencies so that we can encourage of that targeted interdisciplinary research so is that that'll not only help us find cures faster and help with diseases in this country and around the world, but also lead to a greater degree of efficiency and efficient utilization of resources. >> so i very much appreciate the question. i think, actually, the science agencies and the people who work
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within them are increasingly pretty good at figuring out opportunities for interdisciplinary projects and doing them together, and you can see more and more evidence of that. but there are bureaucratic barriers that get in our way. and if one of the requests that you all are putting forward is to have some information about those, i think we could all make some suggestions. some of these may seem like small ball kinds of issues, but they can really get in our way. for instance, that scientists cannot travel to conferences without an enormous amount of paperwork and oversight which is really quite deadening to the scientific community which ends up costing the government more money because the oversight so slow and onerous that you often miss the registration deadline for an earlier cost, and so you pay a higher cost for the travel. i mean, it is, it is actually pretty offensive to many scientists to have this kind of approach taken to something that is the life blood of how you
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build these interdisciplinary connections, which is to get together and talk about shared ideas. so there's a place, for instance, where we could sure use some help. i think jim woolliscroft mentioned at the beginning the amount of paperwork that falls down on the heads of investigators in his institution and many others, much of which is pretty mindless. effort reporting comes to mind, for instance. in terms of those many reports, i think of you saw the washington post documenting, you know, the more than a thousand reports that are somehow still on the books that congress has asked for which it's not clear anybody reads and yet many busy people spend their time compiling these reports. a wit of house cleaning here -- a bit of house cleaning here would be most welcome especially from those who end up spending a lot of our time trying to do that or asking our staff to. that sort of thing. are you interested in some kind of feedback? i think we would all love to provide that.
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>> i wanted to comment a little bit on the concept of interagency interactions. i spent a fair amount of my career in the national -- the department of energy national laboratory, and i think that one of the things that the biomedical enterprise benefited from in the early days of the atomic energy commission and doe and so on was the ability to bring to bear some of the really great engineering and physics skills, mathematical skills that are present in the national laboratories to bear on biomedical problems. and i think that one of the things that's happened over recent years is a certain degree of compartmentalization of mission. so that, you know, the nih takes care of life sciences, and the department of energy is worried about other aspects of biology and science. but there is, in my opinion, a great deal to be gained by bringing these agencies together so that they can combine the
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multiple disciplines that they each encourage in pursuit of some of our really important biomedical problems. it would help us a lot if we could do that. >> jonathan beat me to the lpad punch, but i'm going to take this opportunity to talk about the adapt act that representative green has introduced to encourage the development of new antibiotics. it does fit into your question about collaboration. stick with me for a second. so one of the issues is, um, these drugs would be approved for very limited populations. this legislation would give fda the flexibility to approve drugs, antibiotics to treat serious and life-threatening conditions meeting an unmet need with smaller data sets. so the indications would be targeted, and the clinical trials would be more feasible, and it would be cheaper to
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develop these products for which there's a great unmet need. but then that raises the question of because these drugs won't be studied in broad populations, how do you headache sure -- how do you make sure they're not used in broad populations? because the risk/benefit calculation may not match up for someone with simple pneumonia. so the adapt act uses cdc infrastructure, the national health care safety network, to monitor how these drugs are used. so it's not looking at an individual prescription, but rather kind of a broader approach, just sort of looking at more broadly how the drugs are used to make sure that the drugs are actually used the way congress, if congress passes this legislation. and i think it's a really interesting way to use fda and cdc together to help bring, to help encourage these new drugs and make sure that they're monitored. so it's something that is a
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little outside the box. you asked about collaboration in terms of science on the front end, this is collaboration on the pack end which -- back end which goes to that theme. and i think it's extremely important as well. >> thank you. you know -- go ahead. >> i want to echo the go further on this, what we're calling lpad. i think there's a compelling need for antibiotics, there's no question about it, but i think there's also a compelling need for alzheimer's and big diseases that we're not making a lot of progress on. and i really would encourage we look at how that can be done in a way whether it's buy-in by fda, by companies and by other patient groups, because there is a compelling need, and we're not going to get it just like on the lung cancer trial. one drug at a time. and i think there are opportunities for us to come together and look at that and
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not only look at maybe restricted use, but really look at what we can get in a post-market situation where you really are going to get a lot of good data. >> well, thank you. i just want to, first of all, thank the staff. they worked very hard. the right witnesses here and arranging for everybody's time, and really this has been for about five months we've been beginning to plan this event. i have to say when i got my first gavel as subcommittee chair, the rule of my staff way back when was i really don't want more than four or five witnesses at the table because, you know, i'm going to lose everybody and, you know, votes are going to happen, and we'll miss our planes and all of that. so this was a little violation of that rule, but you all, 11 of you, were really terrific. and i know you've got a lot more to say. and we've got a lot more time to hear you as well. but more than you, there's a lot of other folks that want to contribute as well, and that's what's exciting about this. because as we think about, you
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know, from the government side how do we make the government work better, how do we get faster cures, lots of -- so many talented people involved, but so many people, too, all the disease groups looking and patient groups looking for the answer that we can help provide. and that's what's exciting. weevery one of you talked about, you know, a uniform budget process. you look at the private sector, and often it's a four or five, even eight-year plan that they know they're going to be doing. for us in congress, it's not even year to year because you've got sometimes crs, continuing resolutions that are just short gapped. as you all know, i was on the supercommittee. i was one of those that wanted a solution so we didn't have to rely on the sequester, and i realized that at the end of the day last december we actually did pass a two-year budget. that sets the stage for the appropriators to really do their
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work. for me as a long-time budget reformer, i'd like to see a two-year budget always. it's a great step. but this now allows the appropriators to do their work. it's one of the things i know steny hoyer would have liked to have said today, the right level within the hhs budget, and we're going to try to make sure that happens. i hope that that bill makes it to the floor, and i hope the level is adequate. and if not, i know there are republicans and democrats willing to find other offsets to make sure that it is the right level to really do their job. but this is the first step. i think it's been a very thoughtful, bipartisan -- for sure, partisan, there was no partisanship at all really -- first step of where we want to end up. and i know that joe pitts and frank pallone are going to be working hard as the chairman and the ranking member as we think about the process, the next steps. already diana and i have been
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whispering about let's get the labs here, and we've got -- there's a lot of folks -- >> about a minute left in this discussion. we'll leave it here. you can see it in its entirety anytime in the c-span video library. live now to the wilson center for a discussion on the russia/ukraine crisis and how energy policy is being affected as a result. this is just getting underway. >> for programs here at the wilson center, and i want to welcome everyone on behalf of jane harman, the president, director and ceo of the wilson center, who is out of town at the moment, but she wishes she could be here because this is going to be a really interesting and important session. it's interesting and important both for what you'll hear today and because this is the inaugural session of what will be an ongoing seminar series looking at energy issues in different regions of the world with. we hope to have the series continue more or less on every other month.
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and one of the reasons for doing this is because, obviously, energy is a golden word. we are just talking about how unlike, say, imperial russian law, energy will fill a room in washington. and there are real reasons for that, because the issues we're going to talk about very much will affect how we all live our lives. so it's important for us to be adding to the conversation about energy and to do so by building on the wilson center's strengths, by focusing on regions around the world and bringing in the regional dimension. this series and this book comes from a book which is really the brain child of one of the panelists who's here and has been affiliated with the center for a long time. and he's been the animating force behind a number of center
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activities and for the book that's on sale outside, "energy and security." and this is the second edition of the book. i think the first edition was about the bestseller from the wilson center press. i tell you about because there was a book on terrorism that runs equal with it. [laughter] but it's, obviously, this is an important topic, and jan has always assembled for panels like this wonderful experts. so we're fortunate to have jan with us. he was at chevron for 13 years, eight years in the clinton administration. and we're also very honored to be joined by this very distinguished group of very senior people including a nsc director, and it'll be, i'm sure, a wonderful, wonderful panel. so with that, i'm going to turn the chair over to matt no
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january sky -- row january sky, and in doing so, i want to thank matt and his staff for pulling together this session. as always, the staff has done a wonderful job. matt, it's all yours. >> well, thanks very much, blair. i am not, in fact, carlos pascual. quick who has not yet figured that out -- anybody who has not yet figured that out, you might be in the wrong room. i think part of while -- why we're all here is because of the experts who have written for this book and who have helped the wilson center really to make a mark on the issue of energy. i'm particularly grateful to jan, to david and to julia to give us this kind of content at a time like this, because i think it's of particular concern that not everything be understood through the lens of the current conflict, the current tragedy, the current fascinating developments in ukraine, but actually understood on its merits on a deeper level,
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in some cases in a very technical way in order to be able to grasp what may happen in the future including in connection with the crisis in ukraine. so we won't shy away from that by any means, but i think we want to try and take a broader look at the same time. the kennon institute is the wilson center's oldest program. we celebrated our 40th anniversary this year. we have over 400 alumni throughout the russian federation, more than a hundred all throughout ukraine including, by the way, in crimea. and we're very proud to be the first program here at the wilson center to what will now be this energy series. other programs we expect to follow including china, north america, arctic, latin hurricane, middle east, africa -- latin america, middle east, africa and others. now, when i think about energy in this region, i, frankly, don't think about oil and gas, i
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don't think about power lines, i don't think about environmental impacts, i think mostly about modernization. pause -- because the psychological key for development and for political success in this entire part of the world is modernization. and energy so central to that issue that i think it's almost become a part of the psychological lexicon of politics and of people throughout the post-soviet space. russia is certainly no exception. be i think the panel today can address some of these questions, but i'd like to put them out there. is there a change now with the emergence of a new connection between ukraine but also moldova and georgia to the european union? is there a change fundamentally underway in the dynamics of energy development and modernization in the region? are we beginning to see a real
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cleavage that is going to have real impacts? or are we seeing a temporary blip? will it be just about sanctions until a political deal with reached and then flows will return to normal in every sense? what in the longer term is the positive vision for energy in this region? how can energy be something other than a weapon, an interruption and an inadequacy of the system? and then, of course, are we going to, thanks to the politics which continue to become more and more and more complex rather than less every day -- i think we're seeing that now as mr. boar schoen coe has just relaunched the military campaign in the east of ukraine -- are we going to have the time necessary to make the right kinds of decisions about energy be issues in this region? i think the panel can shed light on all of those questions, and so my first privilege is to introduce jan who will lead us off. jan is a former counselor to chevron corporation, so he knows
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something about energy and, of course, editor of the volume "energy and security." jan? >> well, thank you very much, matt, and also blair for the kind introductions. and it's a great pleasure to be here with my friend and co-editor, david goldwin. we spent many long hours working together on the book, and my co-author for the chapter we did on russia and eurasia and my very good friends john buyerly and bill courtney. sort of like old home week looking at the audience, too, i see a lot of old friends. i'm delighted that you were able to come and join us here. let me just say a few words about the ukraine crisis as a way in the context of how it interacts with energy issues, and then i think david will start from the rubric of the book and tackle it from the other side. in ukraine i guess many feel
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that the immediate crisis may be on its way to stabilizing, but the long-term issues remain. for one, sovereignty, you know, does russia's annexation of crimea stand? does so-called autonomy mean russian hegemonny at least over eastern ukraine? second, eastern retrenchment which seems to be the russia's, russian path at least for the time being. instead of western engagement which seems to be the chosen path in ukraine subject to what happens from day-to-day. every day a new development occurs. nationalist forces are on the rise in russia as in other countries, and opportunities for cooperation, i believe, will narrow to those where interests very much coincide. so an expansive view, i think, one has to be pretty skeptical about. and third, and this gets to energy in russia and ukraine. energy is not just a commodity, it's really an economic life
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preserver and a crucial instrument of influence. and i think it's important to recognize that while we may have a market view of energy from the western perspective, it's very much a power political view from the eastern perspective. americanly, i am skeptical -- personally, i am skeptical that we can expect the situation to do more than stabilize in the near move future, but that is still meaning. violence can diminish, kiev and moscow can return to their own national and regional agendas. regionally, russian tolerance of kiev/e.u. agreement can help open an opportunity for genuine reform, and ukraine's becoming a bridge rather than an orange wedge, a southern finland, if you will. and perhaps president poroshenko will achieve reforms if the oligarchs stick with him if he can secure interregional support
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in this country and if the e.u., u.s. and imf put money where our mouth is. otherwise as the chinese say, big noise upstairs, nobody coming down. and that is very much a possibility given the nature of western behavior which has been lots of rhetoric, some sanctions which are, you know, a very specific, targeted area, but not much, in my view, of a larger strategy. and that is where the role of energy, i think, becomes very important. i'm reminded that the prime minister of the u.k. said recently we have to realize that energy is not a fifth level consideration, it's a first level consideration. and i'm glad that our european friends are coming to that conclusion. we, some of us here in this town have been feeling this for quite a long while, and i'm glad that
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there's some statement to that effect over there. so what about this role? i'd say it's crucial, but in the past it was crucially negative, and in the future it has to be crucially positive. in the past, corrupt middlemen siphoned off with gas revenues ukraine's gas came at exorb stand prices, and russia pressed ahead with alternative pipelines to completely circumvent ukraine. the question in the future is whether ukraine and we can reverse these trends. this implies a concerted everett to replace -- effort to replace overpriced russian gas to overhaul ukraine's domestic gas system and to push back against russia's anti-ukraine pipeline policies. pretty tall order, for sure. is statesmanship possible here? theoretically, yes. energy could reinforce ukraine as a bridge rather than a wedge, and i think at least two
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elements will be needed. first, energy debt rescheduling by russia as part of an imf loan and reform package. and relatedly, pause they can't go -- because they can't go just on their own, replacing the zero sum pipeline game with a plus-plus alternative. for example, ukraine, russia and the e.u. could each invest in one-third of ukraine's trunk pipeline with a golden share held by the state company. these are really big challenges, and i'm not pretending this is something you do by tomorrow or the today after tomorrow. the day after tomorrow. and in the past, the small leaders -- which i think, basically, they were especially in kiev -- were not up to these challenges. but one is always hopeful, and i am an optimist, and i think that better leadership is possible. and certainly we can't do worse in kiev.
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and be crises have a way of forcing leaders to make braver decisions. russia will require, i believe, greater cooperation with the west over time. ukraine and should be part of this perhaps inevitable new agenda. so just to conclude, i'd say that numbering is a key to -- energy is a key to the strategy for ukraine and russia and vice versa. and after david speaks to the other half of this framework, i look forward to hearing from john and bill and julia. it will help us figure out, hopefully, what such a strategy might look like. and i would like to say again how pleased we are to be hosted by kennan which is such a major part of the wilson center's history, and it's a delight to start with this at a timely point given the issues we're facing. thanks. >> david is a former state department special envoy for energy and is the co-editor with jan of "energy and security."
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please. >> thanks, matt. thanks to the wilson center, to all of you for coming. in this book that jan and i put together with all these terrific authors, the title is "energy and security strategies for a world in transition." and two of the primary themes are that the technological advances in the u.s., the shale oil and gas revolution, has changed the position of the u.s. in the energy space both by its relative abundance, by being a leader in technology and by being less of a demander on the world in terms of energy which gives us more status, i think, to talk to others about change. and we really make two primary points. we make a few, because it's an 800-page book. we have the opportunity to make the energy world more resilient by propagating this technology overseas, by connecting u.s. oil and gas abundance to the international market, making oil and gas markets more competitive themselves, by using our role in international financial institutions to make other countries more attractive to energy investment so they can be
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more self-sufficient. and that we can leverage the fact that many producers are now also big consumers; saudi arabia for one. and a lot of consumers have common cause with us and price stability. so we have a little bit more diplomatic capital than we did. that's kind of point one. point two is while we have the ability to make this pivot in our policy and to use energy not as a weapon, but as a force multiplier or a tool or at least as part of our kit to make change and help other countries be more resilient, it's unclear whether we will. it's unclear whether we can manage promoting the development of energy overseas and support for climate change. it's uncertain whether we can utter the words "natural gas" in a policy statement, you know, coming out of the white house and say that we actually want other countries to develop it rather than we want to make the world more resilient because we're using less, and they'll have more. so it's unclear s. so the question as it affects russia and ukraine and i would say europe and the caspian too is
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are we doing all we can with all that we have to maximize this advantage. and i think the short answer to that is, no, not yet. and what i hope we'll talk about today is what our ageneral da should be for europe -- agenda should be for europe. you can't move gas from point to point. are we doing enough as the united states to move europe in that direction? is europe doing enough for itself? development of shale gas. a lot of the opposition comes from gas -- [inaudible] some of it comes from energy giants who will be unnamed in western europe who conot want -- who do not want to give up the relationships they have with you should russia. are we doing enough to advocate for the promotion of indigenous gas in europe and to deal with the environmental consequences in a direct way, or are we too embarrassed to talk about it? with respect to countries, ukraine, i would say poland and some of the others, are we doing enough as the united states to promote internal economic change in those countries, to leverage market reforms so they have a pricing system that somebody might want to invest in?
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again, i think we're not doing enough yet. i think a third category that we have to look at is whether or not we are doing enough on our own to connect to markets, you know? exporting lnq or export -- lng, or exporting crude oil, but when we compete with others, we make markets more competitive. we're the only country in the oecd that restricts the exports of numbering, and we spent the last 35 years telling everyone else to develop all they can. maybe this is not sustainable. maybe we should take a look at this. but i think when we're dealing with these kinds of crises, we have to ask ourselves are we doing enough on on this agenda o promote this? and want the caspian as well? ambassador courtney will address this in his talk, but they're probably wondering where that policy is right now. i think we've done important things. we are helping ukraine with shale gas, with internal reform,
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we're helping them some on debt. but if the strategic option is to make energy less profitable for russia and investment in russia less attractive and provide diversity of supply for europe and diversity of supply for other countries, there's a whole lot more on our agenda that we could that we're not doing, and hopefully this morning we'll talk about what those steps might be. >> thank you very much, david. and thank you both for keeping to our strict time lames. ambassador -- limits. ambassador john byerly was former u.s.word to the russian federation and to bulgaria. john. >> thanks, matt. it's great to be back here at the wilson center again, and, like jan, to see so many familiar faces and committed experts. it's always a little daunting to talk to a crowd like this about russia. i think what i'd like to try to do is we'll talk a lot about energy today. i'd like to maybe just pull back for a minute and look at the general context of the
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relationship, the troubled relationship between russia and the west, russia and the united states, russia and europe. and then hone in on a few aspects that i think make this crisis feel a bit different and then bring it back to the energy side. there's a temptation for those of us who have been doing u.s./soviet, u.s./russia relations for most of our careers to see any dispute between russia and the west as just the latest in a series of cyclical down turns which are almost inevident write followed by up-- inevitably followed by upturns. and i think more importantly there's always been a tendency or an inclination over the last 20 years, since the collapse of the soviet soviet union, to see the strategic paths of russia and the united states, russia and europe, russia and the west as more convergent at the end of the day than divergent.
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for many, many decades, those of us who were in the business of writing talking points including bill and david and jan wrote many times the talking point that we want a relationship between the united states and russia where we can contain our inevitable disagreements and prevent them from doing damage to the areas of the relationship where we have common interests, where we haved shared views, where we have good cooperation. this was never an overwhelming consensus on either side for the last 20 years, but at the end of the day it was usually the argument that won out. and so i think one of the central questions that we need to be asking now whether we're looking at the energy question or regional conflicts in which we'd like russia to work with us is can we still agree that these two countries are on convergent trajectories, or do we see these
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convergent trajectories as achievable. or some people would say even desirable anymore. for me, this current downturn, this current crisis over crimea, over ukraine feels quite a bit different than previous ones that i've experienced in my time working in the soviet union and with russia. and i would point to three quick factors that make it feel different. the first is the scale of the economic ties between russia and the united states, russia and the europeans and, more importantly, the willingness of the americans and the europeans to use or threaten the use of sanctions as a policy tool. this is much more salient now than it was even five years ago when we had a downturn over the, actually, a crisis in the relationship over georgia. the u.s./russia trade relationship hit a high water
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mark in 2012 of about $40 billion, but that's only one-tenth of what the russians trade on an annual basis with the europeans. so the stakes are very, very high at this point. and we used to talk, i used to talk when i was ambassador about how the trade and investment relationship between the united states and russia could serve as something of a shock absorber. it could modulate those inevitable ups and downs in the political relationship that we live through over the years. i think we have to look at that in a different way now, because the size of the economic relationship makes the economic relationship in a way more of a potential hostage to political ups and downs than maybe we thought before. so the economic relationship, the scale of it certainly makes this crisis feel different than previous ones. a second factor is the very complex political context that pote the europeans and -- both
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the europeans and the americans are working at as we formulate and implement our policies. here in washington that statesmanlike-consensus that used to exist that foreign policy stops at the water's edge, we need to work together on, especially on special, important countries like russia. that's been gone for so long, it's hard for some of us old hands to even remember it existed or some of the younger people in the audience to even imagine that it existed. ..
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i would say the situation is worse in russia with the duma and the federation council and their views on the united states. we've got a problem there. meanwhile in brussels as we all know, the ability of the europeans to forge a consensus inside the european union and the commission lead to lowest common denominator solution. none of this engenders respect in russia. so that is the third problem. this makes this crisis feel to me less like a cyclical downturn and more like a signal after fundamental divergence is the growing strength in russia of this persuasive national idea, i don't like to call it ideology but you can use that word if you
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want, that questions utility of partnership with the west and rejects western values and institutions as any kind of a model for russia. now we've seen this happen before in russian history as russia turns away from the west and approaches with the west at some point but it has never happened before at a time when factually russia is as integrated into dependent on and open to the west as is the case now in russia. so it feels to me very much like there are two trajectories inside of russia right now and it is discouraging for me to see how much of that new national idea is founded on a mythology that the west and the united states want to weaken russia. a weak russia, in my opinion, and the opinion of everyone i know who does policy on russia, europe and the united states, a weak russia is our worst nightmare but working with
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russia to make it stronger and to find especially through energy cooperation a way to have russia prosper and become more integrated into the world economy is really the name of the game and i hope we'll be able to dig a little deeper into that in the next hour or so. >> thank you very much, john. bill courtney was u.s. ambassador to kazakhstan and georgia. bill. >> thank you very much. let me comment on the strategic context affecting what i will call the three energy baby giants to the south of russia, azerbaijan, kazakhstan and turkmenistan. in the years ahead strategic environment in this region may undergo dramatic change. the first source of change is china. in 2011 its gdp was 4.7 times larger than russia's. the imf estimates that in 2018 only seven years later, china's
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gdp will be six times higher than russia's. leveraging this economic dynamism, china is investing in energy and in kazakhstan and turkmenistan. china has already broken russia's monopoly over energy export pipelines from central asia. oil and gas flow eastward over long distances to china. last year chinese leader ping visited central asia and signed tens of billions of dollars in commercial deals. china is challenging russia's security real. xiping, proposed a central mechanism for central asia focused regional organization. central asia and russia offer china sources of energy not vulnerable to interdiction by western navies. in this way the u.s. military rebalanced to the asia-pacific is benefiting kazakhstan and turkmenistan. the second source of change is
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russia's ebbing relative power combined with tactics that alienate. russia has long abused its control over energy export pipelines, squeezing land-locked kazahkstan and turkmenistan. in 2009 russian saboteurs blew up pipeline which turkmenistan exports bass. the kremlin opposed the construction of the oil pipeline which takes oil from azerbaijan to turkey bypassing russia. russia is asking neighbors to join the your asia economic union. they are grumbling about the higher cost of imports and elsewhere. emboldened by its seizure of crimea russia might conceivably opt to interfere in for kazakhstan where several million ethnic russians live. russian revoltists might see urgency acting before china's
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growing influence in kazakhstan makes russian intimidation less feasible. another risk to the baby giants is russia's naval buildup in the cast pian sea. in april russia's cast pian sea flotilla called a snap 10-day drill at the same time russian forces are massing on ukraine's border. in both cases russia sought to intimidate. the drawdown of nato forces in afghanistan will reduce the energy security of the baby giants. they will be more vulnerable to flows of narcotics and battle hardened extremists. it will reduce coalition logistics support from central asia and therefore associated revenues. in early 2012, during a blockage of shipments through pakistan, 85% of coalition supplies traversed the former soviet union on the way to afghanistan. now percentages and volume
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always are far lower. the fate of iran could become a forth source of strategic shift. iran has swap arrangements with the three baby giants but they would like to ship more energy to and through iran. if iran were to reach a nuclear accord that led to reduced international sanctions, export options for the baby giants would improve. new extraction technologies may create a fifth strategic shift by diminishing the relative contribution to world energy supplies of azerbaijan, kazakhstan and turkmenistan. illiberal governments and massive corruption characterized the three baby giants since their emergence as independent states 22 years ago. the countries may remain politically stable but the gap between realities and expectations might be rising especially among the younger and better informed.
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if a social or political explosion were to emerge, this could affect the strategic context for energy development. what might these six potential strategic shifts mean for the region and for the west? as jan and julie point out in the book there is need for quote, stable balance among neighboring powers, end quote. azerbaijan and kazakhstan and perhaps turkmenistan will want the west to remain engaged in their region. this will help them assure a stable balance among the two neighboring great powers. the west could help them fill the security vacuum that will emerge as coalition troops withdraw from afghanistan. energy alone will guaranty a degree of western support for the independence and prosperity of the three baby giants. this however may not be enough. as europe and america retrench from some of their far-flung
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commitments they will concentrate their foreign policy energies increasing on countries making progress towards democracy and respect for human rights. we see this already in western support for ukraine and georgia. the main challenge ahead for the three baby giants is to find better ways to couple energy wealth with more freedoms. this will help them build sustainable prosperity and a loyal citizenry that will resist internal and external threats and help the baby giants live at peace with their neighbors, even ones much more powerful. these countries should also try to offset adversities by improving their energy investment climates. according to the world bank's index of the ease of doing business, kazahkstan is near top one-fourth of countries in the world and azerbaijan is in the top 1/3. the finally the west should realize the strength of its support for ukraine against russian aggression and its
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support for reforms in ukraine will send a positive and important signal to central asia and the south caucus sass. caulk cast sus. a row bust economic sanctions on russia, will help deter moscow from coercing other neighbors. demonizing russia is not the right policy but deterring it is. thank you. >> thank you, bill. julian is director of russian and caspian program in inh energy. julia. >> thank you all for coming. what i would like to do spin this in the direction of what we focused quite a bit on shush
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that. to look how russia must be perceiving some developments not only between itself and ukraine but also broader region when you look at ivan and this whole problem of suddenly the instability for countries that have sizable and oil and gas resources. for russia i think if you think about the u.s. unconventional energy boom, it is putting us on a path to overtaking russia to become the world's largest oil-producing nation. we're not there yet. russia produces 10.5 million barrels a day. it is the lead oil producer right now. but moscow has been seeking ways to maintain its competitive edge in both oil and gas production and in exports and really its relationship in this area with the u.s. that is important. oil and gas determine russia's economic and national security. i think that is important to keep in mind. you probably all heard the
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numbers that russia's oil and gas sector contributes about 70% of the country's total export revenues. 50% of its federal budget revenues, 40% of tax revenues. oil and gas contribute about a third of russian gdp and high oil prices contribute significantly to gdp growth. so in order to underpin its ability to keep oil and gas, well actually oil production at competitive levels with the u.s. there is this race for exploration in the arctic which is one of the areas that we've heard about. in order to basically develop the next generation of oil and gas projects in russia, russia will need the help of the international oil industry. and as a result, it is already lining up with some of the world's biggest corporations like exxonmobil, eni of italy, norway's statoil.
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each which bring important political and commercial and technological inputs that are essential for russia today. i think while gas program dismissed the need for shale gas technology and its development in russia one of the areas that is important in the discussion today is that neighboring ukraine has vast, unconventional gas resources and these resources are being targeted by again the international oil industry. shell sign ad production sharing agreement in eastern ukraine which is on hold right now. chevron has an agreement, a production-sharing agreement in western ukraine for unconventional gas. and in a sense, i suppose if ukraine were to stablize you could see these projects moving forward. russia state oil company rosneft has been very supportive of the development of unconventional
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oil resources in russia and it has team up with exxonmobil. in may it teamed up with bp on a pilot project in the volga, urals, exxonmobil is in siberia. u.s. energy information estimated that russia's technically recoverable shale resources are 75 billion barrels of oil. the largest in the world, the u.s. ranks second. so in a sense, there's this energy competition between the u.s. and russia but for russia energy is also a lifeline for its economy. now that bring us backs to one of the subjects of today. given its proximity to russia, the e.u. has developed direct oil and gas pipeline links to its eastern neighbor. the level of russian dependence varies by countries in the e.u. but if you see which countries are most dependent on russian gas, it would be germany number
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one, is the largest importer from gazprom. there is austria and countries of eastern central europe are very dependent on russian gas. when you think about the new pipeline talked about for russia, which would be involving ukraine to the extent that if the south stream gas pipeline were built would marginalize the need for ukraine's gas network. but the countries that are promoting the need for south stream, are austria and latest one to sign up and countries of eastern central europe because they are very dependent on russian gas and their economies are hurt if gas supplies are cut. and in about half of the 28 e.u. member states russian gas accounts for more than 41% of their consumption. in the end i think what we need to look at as well, if we look at the e.u., i think for russia
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the european union, e.u. 28, croatia is the latest member and turkey, they comprise its largest trading partner and they take the majority of russian gas exports with over 50% being shipped across ukraine. and for gazprom europe is the largest of its three markets and it's going to try to hold on to this in terms of revenue and profit and, you know, gazprom sells some gas of course in russia which is a very big market. it is the domestic market. countries of the former soviet union and it has started shipping some lng to asia but we can not forget europe is really the heart of gazprom's market for its gas. i think china will develop over time but, as a result i think what we need to keep in mind as this ukraine and russian relationship develops is that in any case one of the things that russia will look at, whatever
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happens is that it is determined to build, maintain the relationships it has in europe as we've seen. it wants to build a new pipeline into europe and, it will continue to try and not only hold on to its current gas share in europe but to build the share up because europe, it has determined in the future will probably need more russian gas. thank you. >> thank you very much, julia. i will move to the podium to moderate our discussion and thus vacate a spot for the ambassador who i think will join us shortly. so think of your questions. who has questions? yes. right there. identify the name and institution for the panel.
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>> hi. nye name is -- [inaudible] just visiting here. so the discussions about energy in ukraine supposedly but i heard a lot about russia but as far as ukraine is concerned, there was modernization that was used. i heard that ukrainian, ukrainian economy is 2 1/2 more inefficient than russian. so, isn't there a lot of space to improve the energy consumption in ukraine so it is much less dependent on russia's gas and, well, any comments on this? >> who wants to talk about energy efficiency? go ahead. >> i can take a first stab. getting prices right in ukraine is step one. you can put seven or eight other countries in that category of
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the in a system where everyone's electricity and gas prices are subsidized, you have demand which is far higher than it need be otherwise. you need governments to change that system and you only don't subsidize the poor and subsidize everybody is very difficult to do and requires creating a subsidy system that targets people. that worked for world bank and imf. that is diplomatic work for the u.s. and leverage we're trying to give to ukraine to promote those kind of reforms. until you do that, you have countries, companies like shell and chevron that want to develop shale bass in ukraine who they hope can export to countries that can make market price. only when you get internal reform in ukraine that the domestic market will be attractive. there is lot of work to be done. absolutely you can do more on energy efficiency and pricing but no one will invest in energy
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efficiency unless you save money on electricity bill to to invest higher technologies better windows or thermostat, until you pay the for the electricity you're consuming you don't have a price signal. and that is important to do. >> i might add a comment here there's a real problem and challenge in terms of the timing of these issues. when you talk about shale gas development in ukraine, and i hope that there will be plenty available pause if, to the extent there is, the development of resources also a little bit on the offshore side perhaps, that will make it possible for ukraine to have a more, a less dependent policy on other countries. but, in order to get to that point, this is, this is not something you should do overnight. something that requires years of development, exploration, development and production. so the question is, how do you build that bridge from where
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ukraine is presently, which is highly dependent on external sources to one that is less dependent. here is where i think the e.u. really has to step up because there is, the possibility of using the pipes that have been taking the gas in, more for european consumption and, been making that gas available to ukraine. where does the u.s. come in? if we have a more liberal export policy as david is pointing out including exporting lng and obviously that wouldn't go to ukraine directly but it would be going to europe. that requires rigasification facilities in europe. that is an investment. in turn you are able to back in more immediately available gas to the european area which in return will make it possible for europe to be more responsive in this bridge, this time bridge to ukrainian requirements.
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so how do you justify this in your own mind? obviously all of this is money, right? it is not something that is a free good. i believe it is very important to focus public debate on the investment required to have a safer and more secure neighborhood, european neighborhood in which ukraine plays a key role. and, you know, i don't mind the advocacy on national security ground for taking steps to ramp up the rigasification, to pending time that might be more available in ukraine's space and certainly won't cover all of ukraine's requirements. very important thing to focus on. i was reminded of that because
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of the last time that, poroshenko's predecessor was about to sign that european deal, you remember that? there was a $20 billion factor and putin immediately stepped up and said, we'll give you $20 billion in credits and we'll reduce the gas prices overnight. meantime we were suck our thumb i'm sorry to say, figuratively about this. when you think about $20 billion compare that to at least two trillion and looks like almost four trillion we've spent on iraq and afghanistan, you have to wonder about our sense of proportion in terms of our national security strategy. in $20 billion of investment in the security of europe in my mind is lot more important than the number of expenditures we've had to make because of an ill-conceived iraq policy. and we really have to get into
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this debate about making the right invests for the right things and not throwing money at the wrong things. i think ukraine is -- of that action. >> subsidies in ukraine of energy have been up to 40% of purchase price. that is one of the most, if not the most energy inefficient economy in the world in the past. at the heart of the imf program which ukraine is now implementing are reductions in energy subsidies as well as eliminating the overvalued exchange rate. a key internal political issue for ukraine is that some of energy intensive industries in eastern ukraine at realistic market prices for energy will be negative value added producing companies. how the government deals with that economic challenge at the same time it has a security challenge in eastern ukraine will be, will be very interesting to see. of course you have seen prime
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minister yatsunuk refer to his interim government as kamikaze government because in fact he was planning to implement tough energy price realism. >> let me ask all of you a question about the region on more broadly. seems here in the united states, north america we've been fortunate in many ways. one way despite our various adventures in the middle east we haven't had to think of energy con chum and production largely in geopolitical or geostrategic terms. it just hasn't had to be a part of our national mindset of energy. yet in the region we're talking about overwhelmingly clear it is vital and essential. there doesn't seem to be connective tissue between points of consumption decisions you were talking about and for example, politics. your cross-section of ukrainian is not necessarily picturing
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vladmir putin when deciding how much gas to use, how efficient windows to put in their apartment, et cetera. that is just on the efficiency side. you could scale all the way up to, oligarch level production throughout ukraine. there are other economies too where their hand is actually strengthened by increasing energy dependency of neighboring countries and so on. how, what is the smart way to have a region-wide conversation that actually does connect the dots for, not just ordinary people, but people at the point of the tap and the spigot and investment decisions operationally about energy with the geopolitics, so these things don't continue to exist somehow in relationship to each other but divorced? i don't know if that questions makes sense. thoughts? >> well, a quick comment. read frank's chapter in our book here. nice way of advertising the book, which talks about the
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politics of energy and how difficult it is, how very challenging it is and you know, there's no easy answer to the very good question that matt puts but it seems to me that when you think of assistance to ukraine, and i think people are in the mood to talk about that, even despite the general anti-assistance atmosphere, certainly in the european context and i would hope also in the u.s. context, i think it is well worth making an investment in, in inducements, for example, for energy efficiency. here in this country the power companies with the encouragement of the states are inducing us to in fact cut back on our energy consumption for a very good reason. they don't have to build more power plants which are very expensive. well, similarly, if we can build in, and i know that david had a
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lot to do with that thinking when he was in the state department, build into your assistance program as well as our energy strategy the idea that an investment, multilateral, european-u.s., in helping ukraine cut out those subsidies and, reducing the pain of those, of that cutout, so just not ukrainian burden, that's a far better investment i think than many other things as i was trying to suggest earlier, that we throw our money around at, because it has intrinsically so much to do with the course of the country in ukraine and, as ukraine becomes more sort of market-oriented and based, it becomes more resilient, both internally and in terms of its relationship with the countries around it. >> i have to agree with jan.
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politics are really hard in europe. it is probably a mistake to call it region and europeanwide solution. western europe has different economic interests than central east european states and they're not going to change. just like frank's chapter here, it is hard enough in our country but you ever the strategic interest of the country and you have economic interests of entrenched interests. i think the other challenge you have you need a bridge. if you go to bulgaria, you were ambassador in bulgaria, you say we have indigenous gas and we'll bring you alternatives, their answer is yeah, for the next nine years what are we going to do when gazprom cuts off our gas? you have to have some interim solution country by country. for the u.s. we have to look more bilaterally. but for the e.u. the question is, are they going to look at that broad interests that you have identified and act on it or will it be the lowest common
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denominator as we have seen? it is hard to bank on that changing but it is only if we see the european union take on that strategic interest and make hard political choices like, being able to move gas from spain all the way to ukraine, to break some of these, these gazprom interests. that is a germany problem. that is a u.k. problem, that is a brussels problem. that's a big lift. so i think that would be the answer to your question. the e.u. would have to lead those changes and drive the countries to it but i think for the u.s. we can't expect that is going to happen and we have to work in smaller bites. >> right. by the way there are still going to be countries i would imagine, john, like bulgaria will be pr battleground, political battleground where the other parts of this region that have disparate interests will invest in lobbying the opposite way, right? i mean they're doing that to some extent now i guess. >> yes. it's, energy policy is a hard
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sell. domestically it is hard to get people interested. at one level, at another level you're talking in the united states about a very, very simple equation that most people can understand. we want our country to be less dependent on foreign sources of energy and the europeans can kind of condense it all into, we want to be more diversified and less dependent on gas in particular coming from the east. it would seem to me that with some enlightened leadership, both in brussels and in washington we could put those two imperatives together today, that would help the united states help europeans. i take your point, david, europeans, we need to differentiate a bit between the bulgarians and the germans but if we were to, let's say, convene a summit which we set a goal of helping the europeans reduce their gas dependence on russia by 25% in the next two to
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three years i think that would get moskow's attention. it would certainly answer our own and european interests. and interestingly, i think a lot of people in russia would applaud that as well because many of the russian economists, and especially economists i talk to say, only that kind of competition is really going to force the russian economy and russian energy sector to diversify itself and especially to modernize in a way that makes it a more efficient producer in the end. >> i think one of the thinks to keep in mind, european has majority of dependence on pipeline gas and the pipeline gas is dominated by russian gas and those ties are going to be very difficult to break, when you think, gazprom has about 617 bcm of gas it could produce. it is producing under 500 right now. there is just this enormous
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quantity of gas in russia that really should be oriented to european markets. so i guess. the question really for the future, to some degree in europe, yes, lng will be option of some magnitude, is how can you get a cooperative relationship that works better? because 20 years from now, i think what you may find is that the other pipeline forces are going to be diminishing. the one that is left really the russian source of pipeline gas. that is not going to go away. so i don't know how you get from here to there but eventually there has to be a solution because that is where the resources are. >> question here. please wait for the microphone. and introduce yourself. >> my name is elaine. i'm a russian-ukrainian american. so i am ex-ukrainian speaks russia and born in germany and has relatives all over the united states and russia and
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ukraine and many other european countries. so with globalization of the world, the energy is, having a different, a different meaning for me especially because my family is so multinational. and, right now, we all talk about the strategy for the energy sector and we talk about, that yes, ukraine can do shale gas fracking which we like, don't like here in the united states. in some countries in europe, we say, okay, we will deliver more energy to the european union. however, when i speak to my relatives in ukraine they're worried about winter coming. the utility bills go up. what is your opinion on long-term strategy for ukrainians? and how valuable is the situation of mr. poroshenko right now?
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if he can not hold on the prices for utility bills and people go into winter and winter in ukraine, believe me, is very, very cold, without a clear policy what happens to the general population, ukraine will not survive this winter. so what is your opinion and how do you think the situation can be solved in -- >> very short term, are we going to see another winter gas war? bill? >> let me broaden it beyond gas war. if ukraine does not make the energy efficiency changes that the imf is demanding, it will lose western support. it is as simple as that. ukraine is broke. it has no option to continue subsidizing the price of energy and price of gas in ukraine up to 40% or 25% or whatever. there is going to be short-term adjustment. it will be tough in ukraine, there is no getting around that. the most important thing for
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ukraine is start becoming more efficient in use of energy, consume less of it. that will improve its market power relative to russia. it will reduce potential debt it has to russia and get energy at an efficient market price for the future. then ukraine can take advantage of other economic reforms because only with market prices for energy will investors have a good idea what kinds of investments in industry and agriculture and makes, what kinds do not. it will be tough in the short-term but liberalizing the economy and bringing a market price for gas are essential. >> we still need to put a finer point on tough in the short term. i think if i understood the question right, the leverage equation changes dramatically, the political leverage changes dramatically when people have to heat their homes. >> that's right. ukraine could survive a shut off of russian gas up to september and it is not true for the
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winter. diplomatically you need to avoid a shutoff of flows and you need to make sure storage is full and you maximize what you can bring in. no, there is no short-term alternative. you couldn't bring enough goal coal or oil to heat ukraine. >> frack something longer term. >> fracking is longer term. >> could i add to that the short-term alternative is not there for russia either. russia needs ukraine. 84 bcm of gas last year moved across ukraine, of 161 that was consumed by europe 28 members and turkey. russia also needs ukraine. my impression there will be some sort of agreement on the price. i mean, this pricing issue is up for debate right now and russia has cut supplies to ukraine but there has to be an agreement for russia as well. so short term i think for ukraine the issue is, that there's a need on both sides to
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find a solution and that there has to be gas this winter. i agree with you. and if, you know there isn't gas flowing across ukraine into europe, then that is issue with the european union i think russia wants to avoid having, any sort of gas cutoff in the winter. >> i would add to that, even though i'm not a great sanctions fan, i am very much struck by the impact of targeted sanctions. at a time that the russian economy is gdp growth is going down to one or less percent, and before it was in the 7% range the economic consequences of being totally antagonistic, i think are becoming clearer and i think that's having impact on putin and his circle in terms of how they view this.
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secondly, there is an opportunity as i tried to make the point in my opening of a longer term view in which you take another look at shared ownership of trunk pipeline in ukraine. it was tried before under very different circumstances. but if the possibility is there for the e.u. to, and ukraine, and russia to have shared ownership with the golden share and the decision-making voice being ukraine's, that could be incentive for shorter-term approach in terms of pricing. after all, pricing of gas for ukraine has always been politically driven in russia. they were doing everything they could to force the ukraine into eurasian union. that failed. ukraine now is moving in another direction. the question is, how can you keep up, as much of a relationship with ukraine in
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these different circumstances? well the way to do that perhaps, is to talk to, use the prospect of longer-term cooperation in a way that that induces russia to even forgive some of the debt that ukraine owns, owes russia for past gas consumed as part of a deal involving shared equity approaches to the trunk pipeline. it requires a different political environment to start doing this but i think, each side is beginning to recognize the limits of a zero sum strategy here, and, what we need to do i think, as a policy matter is to come up with ideas like this, that show that there are plus plus solutions that are far better than, you know, continuing this mindless violence in the east of ukraine
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and, antagonizing the west to the extent that sanctions will be invoked. all of this can be made into a strategy. how you get public support and congressional understanding, that is beyond my my -- i don't know. i do know much more progress can be made strategically if we approach this in the right way. >> jan, you weren't kidding when you said you were an optimist earlier. the gentleman in over there. >> realistic optimist. >> i will give you that. >> ron davis, former state department. over the past 15 years, gazprom has invested in eu companies, gas systems. has a lot of sub skid airies in the e.u. countries. could you comment on how that factors into this whole matter of reducing dependence, eu
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dependence on russian gas. >> ukraine and europe. >> let me, a couple of things. i guess, the e.u. antitrust policy would end russia both supplier and owner of the downstream transportation infrastructure needs to be enforced and forcefully. you're right, as long as gazprom directly or indirectly controls transportation in europe, then, then it is going to make it harder for these european countries dependent on those flows to resist them and give them more leverage. it is the case now. europe bans destination clauses. theoretically you should be able to sell russian gas anywhere you want. that the russia has interest in the europe pipeline and other pipelines means you can't really move that gas unless gazprom says so. so that impedes the ability ultimately to move, reverse flow natural gas from anywhere else from the border of spain or any place else you can get it into europe where you want it to go.
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that is really the crux of it. they not only need to reverse some ownership that is there but they have to make sure it doesn't go forward. you're right, they have a choke hold. it is just not very visible. >> could i just make a quick comment on that? you know, we all have this view of this gigantic state within the state, gazprom which can do other things to other people. , in the spirit of realistic optimism, let me point out in russia itself there is increased competition over gas. rosneft is moving into the gas territory. novatek is there. they have all very close associations with putin. if anything i think putin is a little bit fed up with the dysfunctionality of gazprom. so point one. point two, gazprom says, well, if you don't want to have our gas we'll give it over to the
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asian side and walk off from europe and horrible things will happen. well, if you take a look at the asian theater, it is heavily subscribed by qatar, australia, potentially western coast of canada, if the u.s. gets its act together, ourselves. the idea that the russians simply shift their gas over to the east, or that this deal with china has all of the price issues resolved, you notice the one thing that was kept secret was pricing. and i think it must be pretty obvious to us why that is because chinese are not going to pay the russians the kind of prices that the ukrainians or anybody else have paid. that's ridiculous. so the room for manuever of gazprom i think has always been overstated in the debate and the degree of competition over gas control in russia is increasing. those are strategic
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opportunities and we ought to get our act together here a little bit and think how we help ukraine, how we can influence russia, how e.u. can be put into the act in a way that is of benefit. think about again, i apologize to those that think it is idealistic, but there is a plus-plus solution which is far better where we are right now. won't satisfy everybody but far better than what we have now. >> gentleman in the white shirt, yellow tie. wait for the mic, please. >> thank you. my name is kovar prosper, faculty member at district of columbia. my question, we talk about congressional support and we talk about this lack of congress understanding what is happening with russia. we talked around it. so what would that look like? what would congressional support look like in the current state for ukraine and russia and what could we do and talk to our
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representatives how to have that conversation? >> john, seems like your wheel house. >> i think on the ukrainian side it would take the form of congressional willingness to pass a special appropriation for ukraine to help with some of these economic problems we described. it would send a signal to russia, moskow, especially people of ukraine that we're putting our money where our mouth is. with regard to russia, i think there is really a dearth of any contact between the russian duma and u.s. congress, between the senate and the russian federation council. the number of contacts that used to be 10, 15 per year have dwindled to almost zero now. we need to work much harder on our side to try to re-establish the links between the leaders on, in the parliaments in both countries and the staff, especially the staff, to help
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dispel some of these mythologies that really do nothing to foster a better understanding or better policy making towards each other in the absence of that, you get laws in russia banning the adoption of russian orphans by americans or you get the magnitsky law in the united states, however well-intentioned it might have been was a net negative in terms of u.s.-russia relations. >> well, we've, we're very fortunate to have been joined by ambassador carlos pascual, the international energy coordinator and head of the bureau of energy and natural resources at the state department. also former u.s. ambassador to ukraine, bill miller in the room. also former u.s. ambassador, i don't know if there are any others but we're certainly well-represented here for state department regional hands and former u.s. ambassador to mexico.
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carlos, just to give you an overview we of course talked about the impact of the crisis in ukraine. ukraine-russia relations, the acute challenge may come this winter when the bargaining positions get very tough. we talked to ambassador beyrle talked about how different the relationship twine russia and the west is now because of depth of economic ties and fact those are being used in the context of a political crisis. we talked of course more broadly about the region including the sort of southern belt of small giants, little giants, i guess bill courtney called them. >> baby giants. >> as per buy january -- azerbaijan, kazakhstan and turkmenistan. i like to give you a few minutes to talk about your perspective and we have time for a few questions before we wrap up. >> thank you. my apologies i could not be with you throughout the entire discussion. i'm glad i was able to join.
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i was going to join at the lunch and jan twisted my arm and asked me if i would come on a few minutes beforehand. thank you for my tolerating jumping in at the last minute and all are good friends and colleagues. i think one of the starting points we have to look at this issue from is the radical change that's happened in the european gas market because as you look at the tensions between russia and ukraine you can't take that out of a wider context what's happened in europe. so after the last gas crisis between russia and ukraine in 2009, europe has taken some extraordinary steps to put in place a much more competitive gas market. it put in market rules under the third energy package so not one single company could own the gas, own the transit systems and own the distribution systems. in effect it has begun to enforce a competitive environment. it has taken away a small thing called destination clauses which has huge impact.
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previously when a country bought gas, for example, germany or gas, it would have to get permission from gazprom to export that gas. the e.u. made that illegal in the european market. once germany get the gas they can sell it to whomever they want to. that is absolutely critical of whole concept of reverse flows going back to ukraine. europe also put in place very extensive infrastructure investments that are still not complete. countries like bulgaria are not part of the network. you can physically move gas west to east, north to south, in ways you previously could not. they have made massive invests in regasification facilities. the other big impact we've seen in the marketplace is caused by the united states. the united states now is producing much more gas than was ever envies saninged. we increased natural gas production by 35% over the last
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five years. as a result of that we're importing about 5 bcm. billion cubic mighters of lng a year but it was previously envisaged we would import 80. particularly in 2011 and 2012 a lot of supplies were redirected toward the european market. those changes, increased availability of supply, the infrastructure, the policy changes, have allowed every single major western european utility to renegotiate their contracts with gazprom to lower the price and extend the financing terms, principally in 2011 and 2012 when that took place. the reason that is so critical is the importance of that market power has created in the european context. and the critical objective for ukraine is to be brought into that community of european energy, european energy so they are part of the strength of a community of 400 million consumers and not just left
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alone. if they can be part of those rules and be treated in the same way as that market is treated, they are in a much stronger position than they are otherwise. that has been the foundation of where we've been trying to move. one of the things that we just got a note about, energy in ukraine it is at heart of economic and politics since independence, right, bill? who controlled gas system and money won elections. that is reality of the past. one of the things of this government is change that and cut a link to the past and bring greater transparency to the energy system and bring greater efficiency to the system that ukraine consumes three times energy than production of unit of gdp than any other country in europe. what are we trying to do? let me give you a perspective. let me run over numbers. apologies if you done this
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already or just stop me. ukraine consumes 50 cubic meters of gas every year. 28 comes from russia. they produce about 20 and get two in so-called reverse flows. in effect using the european market that takes advantage of limited pipeline capacity that currently exists to move gas in a sense backwards through the system, from poland and hungary. and so one of the challenges is how to work with ukraine to be able to change that equation in order to create greater energy security. so in the short term one of the things that we've been working on is expanding those two billion cubic meters of gas to something that could be much larger. poland is at a maximum level of about a rate of 1 1/2 billion cubic meters a year. hungary could be 6.1 billion cubic meters a year. they're currently at just about three. they recently increased a little bit. we're working with both the
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ukrainians, hungarians and gas suppliers to try to understand how they might be able to take that further. slovakia has not had an interconnection but they have recently reached an agreement with ukraine to complete the building a physical interconnection that would al 3 billion cubic meters, 3.2 billion call big meters to flow starting in september and that could be expanded with compression to between eight to 10 billion cubic meters a year. so in effect if you take those possibilities, what it means by the end of 2014 more or less ukraine could potentially have 5 billion cubic meters of gas when you take into account amount of time it is available to flow. by the end of next heating system which would be april 1st of next year, they would have an additional 10 billion cubic meters or total of 10 billion cubic meters of gas that would become available to them through these reverse
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flow mechanisms. the other critical thing to look at is storage. right now ukraine has 14 billion cubic meters of gas in storage. they have to keep five in the system and not use to maintain the structural integrity of their wells. there is a potential for them to build that up a little bit more because right now in the summer they're producing more than they're consuming. they're bringing some in from reverse flows. so if you take that into account, ukraine potentially sufficient gas between reverse flows, production and storage to keep them in reasonable shape till about december. and that becomes the timeline in which they have to reach this agreement with russia in order to be able to restart gas flows. the sooner that they do it the better. one of the reasons that it is important for ukraine to be able to do it is that there's a limitation on the size of the pipeline that can actually move gas from russia to the west. and so at a certain.during
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winder when russia is consuming, europe is consuming, ukraine is consuming, if there aren't already prepositioned supplies in ukraine you will end up with gas shortages right? you have to have a certain almost already there. look at what this could be like in a year if there is some measures taken on energy efficiency. ukraine continues to produce at 20 billion cubic meters. they have 10 billion cubic meeters in reverse flows. so at 30 billion cubic meters. they reduce consumption by about five. then they're in a position where the amount that they would have to import from russia would be decreased to say, 15 billion cubic meters as opposed to the 28 that they're doing right now. that becomes a realistic, a doable scenario. there are at love things that have to happen to make it possible. what is really interesting if you look out a decade. there what we see is that first ukraine has signed
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production-sharing contracts with shell and chevron. it has extensive shale gas capabilities. it also has great capabilities from the redevelopment of existing wells where they can produce more conventional gas from fields that have stopped producing. they have been using the same seven yet technology since the 1970s. with those changes in technologies, realistically ukraine could double its production of gas to a range of 40 to 45 billion cubic meters in the course of a decade. it could expand its reverse flow capabilities. 10 is the minimum that it could do without trying really hard. it could potentially bring that up to 15. just between those two things, production and reverse flows, ukraine could be in the position of producing or having access to 50 to 60 billion cubic meters of gas. remember its total consumption right now is 50. if it puts in place energy efficiency measures, depending
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on how efficiency balances off with future economic growth, you crain realistic i -- ukraine realistically could be in a position within a decade it could make a choice whether it imports gas from russia. if it is commercially advantageous for it do so it can and if it's not it won't. so part of what we're doing is not only trying to help ukraine work through these short-term scenarios but be able to put in place the mechanisms that are going to allow it to work with private investors to be able to boost its production over time. that is something that the united states is engaged in working with the ebrd, the european union, the ifc is interested. the world bank has been another important player. so all of us are engaged in that process. the final thing i just wanted to say is on the negotiation process between russia and ukraine. and here the e.u. really has been absolutely critical.
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i think they have done an outstanding job. they have been lead by the european energy commissioner. essentially the approach that the e.u. has taken is to say that we have tried to create a competitive gas market in europe. we are extending that gas market and rules of that gas market to ukraine which is part of the european energy community. as part of that gas market there are a few basic things you have to do. one you abide by market prices. so the e.u. put on the table a proposal that gave a number of options of what prevailing market prices would be. the second piece of that is if you buy the gas you can trade it. so that there's a freedom to trade and have reverse flows, something that gazprom has contested but the e.u. has supported. and the third is that if you consume the gas you have to pay your debts. and here ukraine has faced a real problem because they have
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significant buildup of debts to gazprom but what they have also agreed in a proposal that the e.u. put on the table they would immediately make payments if in fact there was a package agreement around all of these efforts. russia walked away from that proposed agreement for one basic reason. i think. there were issues that were related to price. there were issues that related to debt but what was really a sticking point, was the ukrainians and e.u. sported them on this, said they needed a mutually agreed contract that was not simply a russian adjustment to an earlier negotiated contract where russia decides to give a discount. what is the reason for that? well the prevailing earlier contract is from 2009 during the period of -- the earlier discount was for the black see fleet. . .
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